📰Inflation Spikes Upwards

Hello. India’s September inflation print clocked in higher than expected. We’ll investigate why, and what this means for the broader economy. Then, we’ll close with Gupshup, a round-up of the most important headlines.

BTW: What percent of the global tiger population lives in India? (Answer at bottom)

Markets

Read here for an appendix on the above.

Analysis

Inflation Surprise Upwards, Rate Cut Expectations Delayed

India’s inflation print came in at 5.49 percent for September 2024 year-over-year, a sharp and unexpected rise upwards from the previous month’s 3.65 percent. This increase was primarily driven by a significant spike in food prices, with the Consumer Food Price Index (CFPI) soaring by 9.24 percent year-on-year. Food inflation particularly hit rural and urban areas hard, with rural inflation rising to 9.08 percent and urban inflation to 9.56 percent.

Last Wednesday, India’s Monetary Policy Committee — the chief authority of the country’s policy interest rates — chose to hold interest rates steady while changing its stance from “withdrawal of accommodation” to neutral. The RBI’s primary target is to maintain inflation at 4 percent, which it seemed the central bank had achieved with August’s inflation print.

Now, it is clear to investors that a much-desired rate cut — which has been pushing down corporate earnings and slowing broader economic growth — will be delayed further.

Food Inflation   Rising prices of grains, vegetables, and pulses, driven by erratic monsoons and supply bottlenecks, have fueled the inflation spike. Import duties on food items have also made domestic production crucial. However, economists at HDFC, DBS, and Kotak expect food inflation to drop below 9 percent as the summer crop is harvested and a strong winter yield is anticipated.

Read also: Top Economist Argues India’s CPI Basket Overcounts Food

Base Effects   Another driver of a higher inflation print is base effects. The base effect refers to how last year’s inflation rate impacts this year’s inflation readings because inflation is measured on a year-over-year (y-o-y) basis. In recent months, we've had a "favorable" base effect. This happened because, last year, prices were rising sharply but then started to level off. When comparing this year's prices to last year's high starting point, inflation appeared lower, even if prices were still rising. However, if prices continue to rise now and last year's inflation is low toward the end, the base effect will make inflation seem higher. That's because we’re comparing current prices to a lower level from last year. Essentially, inflation readings can fluctuate depending on whether last year’s prices were rising or falling at this time.

Shelter Inflation   Housing prices have risen 2.78 percent year-on-year, driven by high-income buyers dominating the market. During the 2022-2023 rate hikes, wealthy buyers remained active, pushing developers to focus on luxury properties. Meanwhile, rents are rising as urbanization grows in both southern and northern India. Experts predict rent will increase 6.5 percent to 10 percent over the next two years, while housing prices are expected to rise 6 percent to 6.25 percent.

Input Price Growth Slowing   There also was a silver lining in the inflation reading: The wholesale price index, which measures the change in producer input prices, slowed to 1.84 percent y-o-y, a leading indicator for future slowdowns in core CPI. Another great sign for the RBI is that WPI had a slight uptick from August (1.31 to 1.84 percent) but this was less than expected by 0.16 percent and was only led by base effect and vegetable prices. 

Next Rate Cut   Economists from HDFC, Kotak, and L&T have all delayed their rate cut forecasts, but consensus is divided between a late 2024 cut versus an early 2025 one. RBI Governor Shaktikanta Das has been adamant on inflation taking a durable downturn towards 4 percent, signaling to markets that rate cuts are not lurking around the corner.

Macro

• India’s industrial output declined by 0.1 percent year-over-year, the first decline in two years. The index of industrial production had grown 4.7 percent in July, and economists surveyed by Bloomberg expected a 1 percent increase. 

• Russia pitched the BRICS payment system to counter the U.S.-dominated global system that the country has been sanctioned out of. A report by Russia's Finance Ministry, central bank, and consultancy Yakov & Partners suggests alternatives to reduce reliance on the dollar, such as developing local currency transactions via commercial and central banks. However, other BRICS nations continue to prioritize access to the dollar, which dominates global payments and trade invoices, as Putin prepares to host the BRICS summit in Kazan. (BBG)

• Ceiling prices for 8 pharmaceutical drugs related to mental health have risen. The NPPA hiked the ceiling price by 50 percent for 8 different drugs, citing that the drugs were already low-cost and front-line treatment items. (Mint)

Equities

• Kenya signs $736 million deal to expand power lines with Adani Energy Solutions. The 30-year to build and maintain the power lines plays a significant role for the company’s revenue growth, which was at $1.8 billion (₹151.4 billion)in 2023 and is expected to grow 20 percent every year. The company has a valuation of $13.9 billion (₹1.17 trillion)

• Chennai Petroleum Corporation Ltd. is in discussions with banks to secure a $3.3 billion (₹280 billion) loan for constructing a major oil refinery in Tamil Nadu, with the State Bank of India leading the transaction, sources said. The loan, which would be the second-largest local-currency loan in India this year, will support the development of a 9 million-ton-a-year refinery, expected to take 36 months to complete once it receives federal approval. (BBG)

• India’s IT titans — Infosys Ltd., Wipro Ltd., and HCL Technologies Ltd. — face pressure as “demand is improving, it is not beating existing estimates,” says HSBC Global Research analysts. Investors are worried about a potential 2025 market correction that could shed value from these highly valued names.

• Reliance profits fell by 5 percent to $1.97 billion (₹166 billion) due to slowing revenue increases and continued increases in input costs. (Economic Times)

Alts

• BlackRock and Singapore’s sovereign wealth fund, GIC, are looking to buy shares in Hyundai Motor India’s upcoming $3.3 billion IPO. Capital Group, Baillie Gifford, and FMR are also interested. (BBG)

• Noel Tata, half-brother of recently passed Ratan Tata, to take control of Tata Trusts, which indirectly manages the $165 billion business conglomerate. Tata Trusts owns 66 percent of the privately held Tata Sons, which controls Tata Consultancy Services, Tata Steel, Tata Motors, and other major Tata subsidiaries. Tata Trusts are primarily the  Sir Ratan Tata Trust and Sir Dorabji Tata Trust, along with 12 affiliated charities. (BBG)

• New studies found that Indian conglomerates are poised to spend $800B (Rs. 67T) in the next decade on capital expenditures. Lots of these advancements are focused on growth while also prioritizing green development. This overall represents a tripling of the past decade’s spending. (The Hindu)

Policy

• India will likely take a small hit from an increase in tariffs in a potential Trump presidency, Bloomberg Economics finds. Further, if Trump wins the 2024 election and follows through with his plan to slap a 60 percent tariff on Chinese goods and 20 percent tariffs on other nations, India’s GDP could shrink by 0.1 percent by 2028

• Both India and Canada have been removing diplomats from each other’s countries as tensions rise again. There is a growing dispute now that Canada is doing an investigation into the murder of Nijjar, someone India believed to be a terrorist in Canada. India retaliated by first removing diplomats and Canada has followed suit. (NYT)

• Upcoming elections in India’s wealthiest state, Maharashtra, continue to become more divided. Nationalist Party RSS, which used to back the BJP, called for Hindus to forget about caste divisions going into the vote, something which will draw voters away from Rahul Gandhi’s opposition party. While the RSS and their leader, Mohan Bhagwat, have been more critical of the BJP they still align more closely to Modi than Gandhi. (The Hindu)

Oh, and 60 percent of the global tiger population lives in India.

See you next week.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

1 USD = 84.07 Indian Rupee